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specific risk. With regard to Richemont, we would highlight the following factors that could
impede achievement of our target price:
Changes in luxury goods demand is correlated to the macroeconomic environment and the
health of consumer spending patterns. Thus, any major change in the external political or
economic scenario that may directly or indirectly affect consumer confidence is a risk to
Richemont’s sales results.
After several two years of steep price increases in the US we are concerned that any return to
further US dollar weakness, which would necessitate further price increases, could impact
demand. We are concerned that the price elasticity could have changed.
Cartier has embarked on a strategy to increase its exposure to the entry-level luxury
market. Up to a point this should be value enhancing‚ but Richemont needs to be watchful
not to erode the brand value.
Richemont’s sales are also exposed to international travel patterns. The SARS virus took a
toll on traveller numbers, but bird flu is now a risk, albeit one that is very hard to quantify.
Terrorism attacks could severely impede travel and hence Richemont’s growth.
Company management is faced with the task of sustaining the more costconscious,
business-case driven strategy, which will require different skills from the old “maison”
driven strategy.
Industry overcapacity and shorter development cycles could see a plethora of new
launches from Richemont and its competitors that could push up costs.
Though we believe Richemont still offers good prospects of upwards earnings revisions
we wonder if the second half of this year will represent the tail end of the supernormal
growth phase. Further, though it is impossible to quantify the odds, there is no denying that
Richemont has shown above-average revenue vulnerability to events that have disrupted
travel patterns. Avian flu could be highly disruptive of travel patterns.
Exposure to the tobacco industry is a more company-specific risk. Richemont’s
investment in BAT gives it exposure to the tobacco industry‚ and the share price is thus
susceptible to the litigation that goes with tobacco.
The above extracted from ”Richemont: What a Wonderful World”, 30 January, 2006,
Analyst: Bruce Hubbard
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